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The Big Dither

Paul Krugmann, New York Times
Last month, in his big speech to Congress, President Obama argued for bold steps to fix America’s dysfunctional banks. “While the cost of action will be great,” he declared, “I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade.”

Many analysts agree. But among people I talk to there’s a growing sense of frustration, even panic, over Mr. Obama’s failure to match his words with deeds. The reality is that when it comes to dealing with the banks, the Obama administration is dithering. Policy is stuck in a holding pattern.

… Think of it this way: by using taxpayer funds to subsidize the prices of toxic waste, the administration would shower benefits on everyone who made the mistake of buying the stuff. Some of those benefits would trickle down to where they’re needed, shoring up the balance sheets of key financial institutions. But most of the benefit would go to people who don’t need or deserve to be rescued.

And this means that the government would have to lay out trillions of dollars to bring the financial system back to health, which would, in turn, both ensure a fierce public outcry and add to already serious concerns about the deficit. (Yes, even strong advocates of fiscal stimulus like yours truly worry about red ink.) Realistically, it’s just not going to happen.

So why has this zombie idea — it keeps being killed, but it keeps coming back — taken such a powerful grip? The answer, I fear, is that officials still aren’t willing to face the facts. They don’t want to face up to the dire state of major financial institutions because it’s very hard to rescue an essentially insolvent bank without, at least temporarily, taking it over. And temporary nationalization is still, apparently, considered unthinkable.

But this refusal to face the facts means, in practice, an absence of action. And I share the president’s fears: inaction could result in an economy that sputters along, not for months or years, but for a decade or more.
(5 March 2009)

Will Keynesianism Be Enough to Halt the Investment Decline?

Socialist Economic Bulletin via MR-Zine
… In only three months the economics of neo-liberalism has theoretically and practically disintegrated under the impact of the worst financial crisis since 1929. There is not a single government in an advanced economy, one which enjoys some freedom of action, which is attempting to meet the present crisis by neo-liberal methods. Neo-liberalism is now confined to fringe monetarist fanatics and the British Conservative Party. All major governments are attempting to meet the economic downturn by what they essentially conceive of as Keynesian methods — and are, far too slowly, being gradually forced along a route from the running of crude budget deficits to more properly Keynesian ‘quantitative easing’.

The issue is whether any of these Keynesian methods will suffice. Or whether only a ‘Chinese’ style solution will work — that is state ownership of a sufficiently large sector of the economy to directly reverse the investment decline.

This will not be decided by economic theory but by how far and how deep the economic downturn goes. China will pursue its own path, which is more effective, but in the US, Europe and Japan if the downturn is ‘moderate’, which in current terms means the worst recession since World War II, then Keynesian methods may control it. If the downturn becomes worse than that then only ‘Chinese’ methods will suffice.
(25 February 2009)

Roubini Says Recession May Continue Until End of 2010

Cherian Thomas, Bloomberg
The global recession may continue until the end of 2010 as the response by governments to rectify it is “too little, too late,” said Nouriel Roubini, the New York University professor who predicted the financial crisis.

“Governments are falling behind the curve,” Roubini said at the India Today Conclave in New Delhi today. “This recession can end up becoming even worse.”

The situation can be improved by appropriate policies, including governments taking over insolvent banks, cleaning them up and re-selling them to private investors, he said. The Group of Seven and the Group of Twenty economies “must act together to get out of this mess,” Roubini said.
(6 March 2009)

How Should Venezuela Face the Coming Recession?

Oil Wars, MR-Zine
… So far most South American countries have not entered into a recession. The primary reason for that is that most of them export commodities — Venezuela and Ecuador oil, Chile copper, Argentina and Brazil food — and commodity prices were actually booming until quite recently. That is, whereas what put the U.S. economy into a recession was the collapse of the housing bubble, which occurred in 2007 and pushed the U.S. into recession at the beginning of 2008, South American countries didn’t see commodity prices decline until this past fall. Hence the recessionary pressures are only just now beginning for most Latin American countries. But, while the recession may be late coming to South America, rest assured it is coming.

The question then becomes what should be done about it? Should countries hunker down by cutting spending in an attempt to keep their budgets balanced and not deplete their foreign reserves? Or should they follow an expansionary policy, ie increase government spending in an attempt to keep their economies growing?

… In order to see why I don’t think Venezuela should resort to expansionary fiscal polices (or Keynesian or counter-cyclical policies as they are sometimes called) I first have to tackle something more basic — what Venezuela’s economic situation is in general and what should be done to promote its long-term development.

Venezuela of course is underdeveloped, and, while certainly it isn’t among the poorest of countries, it is poor relative to the U.S., Europe, Japan, and other developed countries. To get to what most people would consider an adequate level of economic development it will have to have rapid growth for several decades. Therefore, in judging what policies should be followed now, it is as important to consider how they affect Venezuela’s long-term growth prospects as what they would do this year or next (or the former is even more important than the latter). That is, in my view there are more important issues facing Venezuelan policy makers than whether Venezuela goes into a recession right now, namely laying the foundations for longer-term sustained growth. Given that Venezuela is in effect in a permanent state of depression, its focus has to be getting out of THAT depression, not worrying about a recession this or next year.

… Because it is government investment in industry, agriculture, and education that will lead the way to long-term development the government has to be VERY careful about how it spends its money. To the extent it spends its money on the aforementioned investments it can potentially grow faster over time whereas to the extent it spends its money supporting consumption (which ranges from social program expenditures, to paying the government payroll, to giving out CADIVI dollars for travel and the importation of consumer goods) it will be sacrificing investment and hence future growth.

… I’ve recently heard Chavez say that Venezuela is protected from the current economic crisis because it has implemented “socialist” policies. But looking at these numbers I can’t help but think Venezuelans better pray that capitalism pulls out of its death spiral and the price of oil starts going back up because if they actually had to live on the output of these “socialist” factories they would truly be sunk.

… looking at these numbers we can see that the notion that Venezuela is somehow well on its way to being socialist, Bolivarian or otherwise, is pure poppycock.

The two articles above first appeared as entries in the Oil Wars blog, a blog kept by a long-time critical supporter of Venezuela’s Bolivarian process:
(27 February 2009)